BlueMountain's Feldstein, who speared London Whale, is on a roll

Firm boasts $12.7 billion under management

Andrew Feldstein, the Harvard-educated lawyer who leads BlueMountain Capital Management LLC, has had a good run.

His firm boasts just one losing year since it was started in 2003. Assets have swelled to $12.7 billion, and he has 150 people in New York and London helping him manage the abstruse derivatives contracts he likes to trade: credit-default swaps, collateralized debt obligations, synthetic CDOs, mortgage bonds, swaptions -- the alphabet soup of stuff that went bad in 2008.

Feldstein is best known for his June coup, when he bet against the London Whale -- JPMorgan Chase & Co. trader Bruno Iksil -- who was long and wrong on $100 billion in credit derivatives. That play reaped $300 million for BlueMountain, according to people familiar with the matter. JPMorgan lost $6.2 billion. Feldstein did more than make money. He also helped Chief Executive Officer Jamie Dimon unwind JPMorgan’s trades, earning points with America’s most powerful banker, Bloomberg Markets will report in its February issue.

JPMorgan and BlueMountain are tight. Feldstein worked at JPMorgan for a decade before going it alone, and the bank is BlueMountain’s biggest broker. They entwined even more this week when BlueMountain hired James “Jes” Staley, a 34-year JPMorgan veteran once considered a candidate to succeed Dimon. Staley will be a managing partner and buy a stake in the firm.

Staley is joining a lucrative enterprise. Feldstein’s $5.1 billion flagship fund, BlueMountain Credit Alternatives, rose 13.3 percent through October, making it No. 51 in Bloomberg Markets’ annual ranking of the top 100 large hedge funds. Credit Alternatives was the 20th-most-profitable fund, producing $134.7 million for BlueMountain. Since its inception in late 2003, the fund has returned an average of 10 percent a year.

UBS Deal

Feldstein, 48, who declined to be interviewed for this story, expects the good times to keep rolling. In October, BlueMountain started soliciting new investors for Credit Alternatives through UBS AG, Switzerland’s biggest bank. By pooling their money, UBS’s wealthy clients can each put in $250,000, far less than the $1 million-plus that hedge funds typically demand.

That could be a dangerous proposition, says Peter Rup, chief investment officer at Artemis Wealth Advisors LLC in New York. He says credit markets are poised for a fall.

“The good rates of return in this market have been had,” Rup says. “The unsophisticated buyer is going to get hurt.”

Money Flow

BlueMountain is raking money into a new fund, too. It raised $1.5 billion for the BlueMountain Credit Opportunities Master Fund I in October, twice what it expected, BlueMountain co-founder Stephen Siderow said in an interview with Bloomberg Television. Feldstein is betting that BlueMountain can make money on assets that banks no longer want to own and on loans that banks no longer want to make, according to an October marketing document for the new fund obtained by Bloomberg Markets. As banks shed risky assets, Feldstein is making money picking through these flea markets of finance.

“This market will continue to grow,” says Paul Rowady, a senior analyst at research firm Tabb Group LLC in New York. “Their intuition to be a leader is spot on.”

BlueMountain has purchased securities backed by a film library and subprime car loans and has looked at bonds built from time shares, according to the pitch for its new fund. It also buys CDOs -- pools of mortgages and other loans that, pre- 2007, banks assembled, cut into tranches according to risk and sold to investors. Synthetic CDOs are made of CDSs that insure bonds; the swaps pay the holder if a company defaults on its debt. Originally, banks used them to extend credit to corporations. Then they became tools for speculation.

‘C’ Trouble

BlueMountain has company around the bargain bin, particularly when it comes to collateralized loan obligations, or CLOs, which are securities built out of loans.

“You’d have thought anything with a C in front of it would have been toxic after 2008,” says Bonnie Baha, a fund manager at DoubleLine Capital LP in Los Angeles, which oversees $50 billion. “But the bid seems to be never ending. It’s been a nice ride, but it’s not going to go on forever.”

BlueMountain says that in 2011 it bought a portfolio of synthetic CDOs and CDSs from Montrouge, France-based Credit Agricole SA. The sale cut Agricole’s risk-weighted assets -- which must be protected by a capital buffer -- by $18 billion, the bank says.

“We think there will be more of those types of transactions,” Siderow said in his Bloomberg Television interview.

Dr. Frankenstein

For banks such as Credit Agricole, tapping Feldstein is like having a tall, green monster on the rampage and calling in Dr. Frankenstein to deal with it. He was on the JPMorgan team that helped create credit derivatives in the early 1990s.

BlueMountain often exploits tiny, intermittent differences in price among bonds and the swaps that insure them. It uses custom algorithms to arbitrage those swaps and the indexes that London-based Markit Group Ltd. owns and manages.

Even so, none of the eight men who run BlueMountain are quantitative traders. Michael Liberman, BlueMountain’s chief risk officer, who has a master’s degree in math from Brandeis University, comes closest.

Rather, Feldstein, Siderow and the others are mostly MBAs and lawyers. A law degree helps when you’re dealing with CDO prospectuses, which run to 350 pages and make stock-offering documents read like spy thrillers.

Feldstein grew up far from the world of finance, in Flagstaff, Arizona. His father, Murray, a urologist, was elected to the Flagstaff City Council as a Libertarian in 1980, giving the party, founded in 1971, one of its first victories.

Power Couple

Andrew went east for school and graduated magna cum laude from Georgetown University in Washington. He then worked at consulting firm Bain & Co., where he met Jane Veron, a Yale University graduate -- also magna cum laude -- whom he married after leaving Bain to attend Harvard Law School, according to a 1989 announcement in the New York Times.

At Harvard, he played pickup basketball with classmate Barack Obama. Feldstein said he can tell a lot about people by how they play the game.

“He was a leader,” he said in a 2008 Financial Times video interview. “He could have scored or he could have passed, and he passed.”

In the 2008 election, Feldstein gave $4,600 to Obama, $6,900 to Hillary Clinton and $2,300 to fellow Arizonan John McCain, his only donation to a Republican that cycle, according to the Center for Responsive Politics. He gave nothing to Obama in 2012.

Network Effect

Feldstein hired on at JPMorgan in 1992 and spent the next decade finding new ways to make money with derivative products. In 2003, Feldstein started BlueMountain with Siderow, whom he knew from Harvard Law. Siderow had been working at McKinsey & Co. in New York.

The pair tapped their networks for talent. Chief risk officer Liberman also worked at JPMorgan before joining BlueMountain in 2004, as did Peter Greatrex, who signed up in 2007. Alan Gerstein, another friend of Feldstein’s from the bank, joined in 2004 after a stint at Goldman Sachs Group Inc., where he knew Bryce Markus, who joined BlueMountain in 2005, and Derek Smith, who came onboard in 2008.

David Rubenstein, another Harvard Law grad, knew Siderow at McKinsey and came to BlueMountain in 2006.

All have equity in the company, and ownership is lucrative. In 2010, Markus, 35, bought a Park Avenue apartment from Goldman Sachs Chief Executive Officer Lloyd Blankfein for $12.2 million, according to real estate records.

Crossing Dealers

In its first few years in business, BlueMountain practiced a strategy known on Wall Street as crossing dealers, according to three people familiar with the firm’s trading.

In one example, BlueMountain would call a handful of banks and ask for prices on bespoke securities -- CDOs that had been cut into custom tranches by the banks that bought and sold them. It would buy from the bank quoting low and sell to the one quoting high. The move rankled some bankers. BlueMountain’s defenders say it was just taking advantage of inefficiencies in the market for the benefit of its clients.

Feldstein and Siderow declined to comment on the matter.

London-based Barclays Plc, a longtime Feldstein banker, says it has no complaint about its treatment by BlueMountain.

“The trading desk has consistently maintained a strong working relationship with BlueMountain over many years and market cycles,” Drew Mogavero, global head of high yield and U.S. credit derivative trading, wrote in an e-mail. “We have found them to be a valuable business partner and a top trading account.”